Earlier today, I looked at three FTSE 100 stocks I’d be inclined to buy with my new ISA allowance if I were focused on growing my money. My goal here however, is to pick out cheap shares from the top tier that could generate sustainable passive income. The first pick doesn’t strike me as controversial.
Viva Aviva
The Aviva (LSE: AV) share price is up slightly, year-to-date. When it’s considered just how volatile the markets have been, that’s no small achievement.
At least some of this may be due to just how cheap the already stock is. As I type, I can pick up shares in the insurance and savings giant for 10 times earnings. Based on analyst expectations, this valuation drops to just eight times earnings in FY23. I suspect this could make the £16bn-cap popular with investors if the rotation away from growth stocks continues in 2022.
Are there better businesses in the FTSE 100? Yes. Is Aviva’s success tied to the health of the UK economy? To a degree. However, the objective is passive income. And on this front, Aviva looks a cracking buy.
Chunky dividend yield
Based on the current share price and earnings estimates, there’s a 6.5% yield penciled in for FY22. That should help counter the impact of inflation. It’s also expected to be nicely covered by profit, giving holders a degree of security. Bar the odd exception (eg 2019), the company has a great record of hiking dividends on an annual basis as well.
With more of us recognising the importance of getting our retirement plans in order, I continue to think Aviva will keep giving dividend hunters exactly what they want.
Another top passive income stock
Perhaps as a result of the financial crash in 2008, I’ve never been keen on housebuilders. This episode succeeded in teaching me that nothing is risk-free when it comes to the stock market. And despite the fact that we all need somewhere to live, the housing market is notoriously cyclical.
All that said, I can definitely see the appeal with my passive income-seeking hat firmly on. Based on current projections, the business yields 7.5% — even more than Aviva!
Taylor Wimpey‘s shares aren’t expensive either. The FTSE 100 property firm currently trades on 7 times earnings. That’s a bargain relative to the wider market. Since we should really be comparing oranges with oranges, it’s worth mentioning that this is also cheaper than peer Persimmon (P/E of nearer nine times earnings).
For added diversification
To ensure my cash was nicely diversified across different parts of the market, British American Tobacco (LSE: BAT) would also get a look-in. Like the others mentioned here, it offers a chunky dividend yield, this time of 7%. That’s roughly double what I’d get from the FTSE 100 index as a whole.
Again, there are things to be considered. Aside from a questionable long-term outlook for the tobacco industry, the threat of further regulation is never far away.
Then again, what’s the alternative – cash savings? Beyond a ‘rainy day’ fund, I actually think this is a far worse option for me.
So there you have it: three cheap FTSE 100 stocks, collectively generating an average yield of 7%. That would be more than enough to scratch my passive income itch.
